Employees work on an electric vehicle production at a factory in Nanchang, Jiangxi province, China, on May 22.KEVIN KROLICKI/Reuters
China, the world’s biggest market for just about everything, was a boon for Europe’s biggest car companies, especially the German ones. Many of them formed local joint ventures and made fortunes as wealthy Chinese spurned cheapo domestic brands and snapped up Volkswagens, Mercedes, BMWs and other European and American showroom delights.
As recently as 2020, foreign brands’ share of total Chinese auto sales (gasoline, diesel, hybrid and fully electric) was nearly two-thirds. Today, it’s 37 per cent – and falling. China is no longer the gift that keeps on giving. Homegrown Chinese cars, notably the electric ones, are moving up the quality and value chain fast and sending the foreign nameplates packing.
At the same time, Chinese car companies are making inroads into Europe. The European automakers can’t win. They are losing market share in China and sales and profits are slumping in their home market as Chinese electric vehicles that are affordable find buyers who can’t afford an electric Audi that costs more than a child’s university education.
How will the European automakers slow, or reverse, their fall? One idea is, in effect, to admit that China is winning – or has already won – the EV sweepstakes and reverse their strategy: instead of forming joint ventures in China, have Chinese partners form them in Europe with European partners.
The process is already under way, though is somewhat tentative at the moment. Stellantis NV STLA-N, the transatlantic car maker that owns the Citroen, Fiat and Jeep brands, has teamed up with China’s Leapmotor. Together they are building cars outside of China through their joint venture. No other European automaker has replicated the Stellantis move. That could change.
Volkswagen AG VLKAF shows how the mighty have fallen as European sales soften, Chinese EVs extend their lead, and European regulators try to kill off the internal combustion engine. Early this week, the world’s No. 2 automaker (Toyota is biggest) announced the unthinkable – for the first time in its 87-year history, it will close plants in Germany. It is also closing an Audi plant in Brussels.
The closings are part of the company’s biggest-ever restructuring. Tens of thousands of employees are to be let go and management is calling for a 10-per-cent wage cut at the sputtering VW brand. Its unions had been demanding a 7-per-cent wage hike – good luck with that.
There is no good news at the company. In the first nine months of 2024, Volkswagen’s car sales in China dropped 12 per cent over last year, and Western European sales were down 1 per cent. The company has issued two profit warnings this year. On Wednesday, it reported that net profits for the September quarter fell to €1.57-billion (about $2.4-billion) from €4.3-billion (about $6.5-billion) a year earlier. The company’s operating profit margin shrank to 3.6 per cent from 6.2 per cent.
No wonder VW has been a stock market dud. Its shares have lost 9 per cent in a year and are down by almost two-thirds since their peak of more than €240 (about $362) a share in 2021. Tesla Inc. TSLA-Q, whose shares are up 25 per cent over the past year, is worth 15 times more, even though its car production is one-fifth of its German rival’s.
Volkswagen’s woes are a sign of the crisis to come in the German, and European, auto industry. China’s lead in EVs seems insurmountable, all the more so since the country has locked, or is locking up, the global supplies and refining of many critical metals for EV batteries, such as cobalt, nickel, copper and graphite. China’s share of key battery components for EVs is estimated at 80 per cent, meaning no Western car maker that needs batteries for its EVs can avoid enriching Chinese suppliers.
Western car companies’ market share is bound to keep falling as Chinese car companies turn from metal bashers into masters of design and software development. Chinese auto companies can pump out new models years faster than their European rivals.
In response to the Chinese onslaught, the European Union is hitting imports of Chinese EVs with tariffs as high as 45 per cent, though many of them are much lower. The tariffs on Chinese-built Teslas, for instance, are only 7.8 per cent.
The protectionism could backfire. China could retaliate by imposing tariffs on European exports, including European cars. Or, to avoid the tariffs, Chinese car companies could build more EV and battery plants in the EU, piling up the competitive pressure on the European car makers. Hungary is soaking up billions of dollars in Chinese investment in EVs and batteries as the country emerges as the Chinese bridgehead to the vast European auto market.
Barring Stellantis, whose joint venture with Leapmotor is already producing cheap EVs at a Stellantis plant in Poland, the European automakers appear to have no plan to reverse China’s lead in the EV and battery markets other than to cut costs drastically and shrink their operations – admitting, in effect, that they made grave strategic errors years ago. Companies rarely shrink their ways to success.